From: rdavies48@comcast.net
Sent: Sunday, February 08, 2004 10:03 PM
To: rule-comments@sec.gov
VIA EMAIL
rule-comments@sec.gov
February 8, 2003
Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Comment on proposed amendment to rules governing pricing of mutual fund shares;
File No. S7-27-03
Dear Mr. Katz:
As an employer that sponsors a qualified retirement for our employees, we are writing
to express our concern about the impact on millions of participants in qualified
retirement plans of the proposed "hard 4 p.m. Eastern Time (ET) close" contained in
Release No. IC-26288 (proposed amendment to rules governing pricing of mutual fund
shares).
Imposition of a hard 4 p.m. ET close will significantly burden employer-sponsored
retirement plans and result in delayed trading for plan participants compared to other
investors, resulting in an uneven playing field.
Millions of retirement plan participants may be relegated to next day trading if
transactions must be provided to the mutual fund itself (rather than a third-party
intermediary) by 4 p.m. ET. Participants typically place their retirement plan trades
through recordkeepers or third party administrators (TPAs) that perform significant
administrative activity after trades are closed to participants. These recordkeepers and
TPAs enter into agreements with various mutual fund companies, allowing the recordkeepers
or TPAs to take trades from participants as the mutual funds' agent until the 4 p.m.
deadline, and then provide trades to the mutual fund at a later deadline. Under the
proposed rule, however, the best case scenario would result in a trading deadline for
participants as early as 10 a.m. ET (or 7 a.m. PT) in order to meet a mutual fund's hard
4 p.m. ET deadline.
Because qualified plans are subject to a myriad of statutory and regulatory
requirements, the recordkeeper or TPA performs a variety of functions after the trades
are closed to participants. These functions, which currently occur after the 4 p.m.
close, include gathering transfer instructions from different sources such as participant
web sites and telephonic voice response systems, and running various statutory and
regulatory checks and edits on the information such as determining the validity of
transfer requests, reviewing loan and distribution requests and verifying cash
availability for contributions. Due to the open structure of the investments in many
plans (participants can trade in and out of funds across several different mutual fund
companies), the recordkeeper or TPA also needs the funds' calculated NAV to process a
trade involving multiple mutual funds on the same day the participant trading
instructions are received. Although the NAV is provided after the 4 p.m. close,
recordkeepers and TPAs can make those calculations with the NAV post-4 p.m. under the
present system as long as the trades have been submitted to them by 4 p.m.
Some have argued that the trading delays for retirement plan participants caused by the
hard 4 p.m. close do not significantly disadvantage these participants because their
investments are long-term investments for retirement. However, long-term investors are
not necessarily committed to a particular fund for the long term. Many investors, inside
and outside of retirement plans, perform strategic asset reallocation periodically and
those investors justifiably expect same day trading. The length of one's investment time
horizon is not a valid reason to disadvantage that investor.
Studies have shown that being out of the market for even a few days periodically can
result in a decrease in returns. A major world event could significantly affect the
market after trading is closed to plan participants under the proposed rule. These
participants would be locked in the market for another day while those investing directly
with the mutual fund would not.
These adverse consequences are unnecessary and can be avoided while addressing the
late-trading issues through a technological solution. The solution proposed by the U.S.
House of Representatives in the Mutual Funds Integrity and Fee Transparency Act of 2003
(H.R. 2420), which passed the House in November 2003 on a 418 to 2 vote, would address
many of the mutual fund industry problems including late-trading issues.
H.R. 2420, as passed by the House, has specific language designed to remedy the harm
that will otherwise occur to plan participants under the hard 4 p.m. close approach. The
language directs the Commission to issue rules to prevent after-hours trading but states
the rules are to include an exception for broker-dealers, retirement plan administrators
and other intermediaries if the trades are collected by the intermediaries using
procedures:
a.. Designed to prevent the acceptance of trades by such intermediaries after the
time at which net asset value was determined, and
b.. Subject to an independent annual audit to verify that the procedures do not
permit the acceptance of trades after the time at which such net asset value was
determined.
Technology exists today that will time stamp trades placed with most recordkeepers and
TPAs. These systems, which could be subjected to outside audit, could be modified quickly
to provide the protections that investors and the SEC are seeking.
We urge you to consider and adopt these technology solutions that would address the
legitimate concerns surrounding late trading without relegating plan participants to
second-class investor status.
Sincerely,
Beth Davies
Trustee of a Participant Directed 401(k) Plan